In recent years, Japan’s economy has been going through a resurgence, as it tries to reclaim the global power it had back in the 90s and 2000s.

We represent numerous clients across the globe who have investments or other income in Japan.

There are several cross-border reporting, tax and disclosure issues to consider when dealing with U.S. Tax and Japan.

Thile confusion can lead to massive problems and headaches – especially for the inexperienced practitioner.

Common questions we receive regarding Japan:

Do I report Accounts I had before becoming a U.S. Person?

Do I pay U.S. Tax on Tax-Free earnings from Japan?

How do I report a “Kabushiki Kaisha”?

Is my Rental Income reported in the U.S.?

Does the U.S. & Japan have a Tax Treaty?

Does the U.S. & Japan have a FATCA Agreement?

What if the Bank already withheld my tax and paid to the Government?

Income Tax Treaty

The United States has entered into an income tax treaty with Japan. Since there is a Tax Treaty between the U.S. & Japan, it is important to refer to the treaty when analyzing any tax issue involving the two countries.

Estate Tax Treaty

The United States has entered into 19 estate tax treaties with various different countries, including Japan — which has a Gift and Estate Tax Treaty.

You should speak with an estate planning attorney well-versed on U.S. & Japanese estate planning laws prior to executing an estate plan, if you are a US person who has significant assets in Japan.

Receiving a Gift or Inheritance From a Foreign Person

If you are a U.S. Person and receive a gift from a Foreign Person, Foreign Business or Foreign Trust, you may have to file a Form 3520. The failure to file these forms may lead to IRS Fines and Penalties (see below).

FATCA

FATCA is the Foreign Account Tax Compliance Act. It is a US tax law designed to combat offshore tax evasion and facilitate the reporting of foreign accounts.

There are more than 110 countries that have entered into FATCA agreements with the United States, and Japan and the U.S. have had a FATCA Agreement in effect since 2013.

What Does This Mean to You?

It means that hundreds of thousands of Foreign Financial Institutions (FFIs) worldwide (including Japan) are proactively reporting US account holder information to the United States.

Many FFIs appear to simply be gathering and reporting individuals to the U.S. if there are any ties between the account-holder and United States (current U.S. address, former U.S. address, U.S. citizen or U.S. Legal Permanent Resident status).

FATCA Reporting can have very serious consequences for many reasons:

– Non-Reporting of FBAR (Penalties range from a penalty waiver, all the way up 100% value of the penalty in a multi-year audit and determination of willfulness)

– Penalty Non-Compliance with FATCA Penalties ($60,000 Max)

– Discovery of Nominee or other Unreported Companies not properly reported on Form 5471 or 8865

– Discovery of PFIC (Passive Foreign Investment Companies) and penalties under 8621 (non-monetary, but still intrusive)

– If an Account was used to receive or transfer a monetary gift (s) to the U.S., it may lead to various penalties as well

The United States has made international tax compliance a key enforcement priority, and recently announced several new tax compliance groups designed to focus on offshore and foreign money.

Which Banks in Japan Report U.S. Account Holders?

As of now, there are nearly 21,500 Foreign Financial Institutions, within Japan that report US account holder information to the IRS.

What is important to note, is that the list is not limited to just bank accounts. Rather, when it comes to FATCA or FBAR Reporting, it may involve a much more broad spectrum of assets and accounts, including:

Bank Accounts

Investment Accounts

Retirement Accounts

Direct Stock Ownership

ETF and Mutual Fund Accounts

Pension Accounts

Life Insurance or Life Assurance Policies

FBAR (Treasury Department Form FinCEN 114)

The FBAR aka FinCEN 114 is a form which is required to be filed by any US taxpayer who has an annual aggregate total of more than $10,000 overseas at any time during the year. It does not matter whether the money is in one bank account or scattered over numerous bank accounts; moreover, it does not matter if your account has $10,000 in it – it is important to remember that the threshold requirement is more than $10,000 in total annual aggregate of all your foreign accounts.

*Whether or not a country has entered into a FATCA agreement has no bearing on whether you as an individual or business are required to report your foreign accounts.

FBAR Reporting

If you, your family, your business, your foreign trust, and/or PFIC (Passive Foreign Investment Company) have more than $10,000 (in annual aggregate total at any time) overseas in foreign accounts and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance. There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOT) filing initiatives, and FATCA (Foreign Account Tax Compliance Act). Filing FBARs and ensuring compliance with IRS International Tax Laws, Rules, and Regulations is extremely important for anyone, or any business that maintains:

Foreign Bank Accounts

Foreign Savings Accounts

Foreign Investment Accounts

Foreign Securities Accounts

Foreign Mutual Funds

Foreign Trusts

Foreign Retirement Plans

Foreign Business and/or Corporate Accounts

Foreign Life Insurance Policies (including some Life Insurance)

Foreign Accounts held in a CFC (Controlled Foreign Corporation); or

Foreign Accounts held in a PFIC (Passive Foreign Investment Company)

FATCA (IRS Form 8938)

As described above, the goal of FATCA is to reduce offshore tax fraud and evasion. Like the FBAR, whether or not a foreign country has entered into a FATCA Agreement has no bearing on whether an individual has to file a FATCA form 8938. While there are many aspects and facets to FATCA, for individual taxpayers the main issue is usually the timely filing of form 8938.

Unlike the FBAR that has been unwavering threshold for filing, the threshold requirements for an 8938 vary, and are based on whether a person is married or single and/or whether they reside in the United States or outside of the United States.

Foreign Life Insurance – U.S. Tax

Foreign life insurance is a source of confusion for many individuals – rightly so, since the IRS has been unclear regarding the reporting requirements. Essentially, if the foreign life insurance policy has a surrender value, then it must be reported on an FBAR and/or 8938 (if the individual otherwise meets the threshold requirements).

In addition, if the insurance policy is a hybrid policy/annuity that generates current income such as interest, bonus, or dividends than that earned income must be reported as well. It generally does not matter if the income is not actually distributed and/or whether you paid foreign tax on the earnings already.

**There is another form, entitled a form 720 which involves excise tax on foreign insurance premiums. While the law is not clear, the general understanding amongst most experienced practitioners is that the form is limited to employers paying excise tax and not necessarily individuals — but individuals may error on the side of caution and file the form anyway.

Common Corporate Structures – De Facto

The United States has very strict rules when it comes to foreign corporations. In order to circumvent the very comprehensive reporting requirements necessary to get into tax compliance for foreign corporations, the IRS has laws in place to allow “disregarding of the entity.”

On a very basic level what that means is that if you have an entity such as an LLC, you may be able to disregard the entity for tax purposes. Thus, while you still have LLC protection for your business (if for example it was sued), you do not have to go through the rigorous reporting requirements of the LLC as if it was a corporation. Rather, you can simply disregard the entity and report all of the income, taxes, deductions etc. directly on your 1040 tax return form/schedule C.

When it comes to foreign businesses, certain businesses must file in the United States as a corporation. In other words, even if it is a one-person business that may seem similar to a U.S. single member LLC (SMLLC) – which would otherwise qualify for being disregarded – the IRS will not allow certain for business structures to be disregarded.

At the current time, Japan is listed in the IRC (Internal Revenue Code) as having a De Facto Corporate Status for all “Kabushiki Kaishai.”

Income Tax & U.S. Citizens, Green Card Holders & Residents

The requirement to file U.S. tax returns (unless a person is otherwise exempted or excluded) is a requirement that comes along with being a US Citizen and/or Legal Permanent Resident. Under U.S. tax law, the United States taxes U.S. taxpayers on their worldwide income.

Did You Recently Give Up Green Card?

Unfortunately, that does not mean you are out of the clear just yet…

Just because you recently gave up your Green Card does not mean you are automatically exempt from filing U.S. Tax Returns. Long-Term Green Card Holders who meet the definition of “Covered Expatriate” may still have to file and pay U.S. Taxes.

Covered Expatriate is a complex analysis that requires the assistance of an experienced International Tax Lawyer.

Totalization Agreement

The purpose of a Totalization Agreement is to help individuals avoid double taxation on Social Security (aka U.S. individuals living abroad and who might be subject to both US and foreign Social Security tax [especially self-employed individuals] from having to pay Social Security taxes to both countries).

As provided by the IRS: “The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country”

The United States has only entered into 26 Totalization Agreements, and JAPAN is one of the countries we have entered into a Totalization Agreement.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include: